Generally, banking stocks (XLF) trade between 1x and 2x their book values. Stocks trading lower than their book value attract investor attention because they are considered to be generating extremely poor returns. Price-to-book value (or PBV) compares a company’s current market price to its book value. These ratios are commonly used to compare financial services firms because most assets and liabilities of banks are constantly valued at market values. If a company trades lower than its book value, it means that either the asset value is overstated, or the company is generating a poor return on its assets.
Goldman Sachs trades 5% above its book value and 18 times its one-year forward earnings. In the last five years, it has traded at an average discount of 8% to its book value. These measures are also way below what Goldman’s average PE and PBV ratios have been since it went public in 1999. Its valuations are currently suppressed and analysts consider it an inexpensive value buy.